City undermines Brown's growth forecasts as stock market slides

Investment banks in the City of London handed down a damning judgement on the Chancellor's economic forecasts yesterday.

The first poll of forecasts for the economy in 2004 showed the City expects GDP growth of 2.4 per cent in 2004 compared with the Treasury's range of 3.0 to 3.5 per cent. The average growth forecast for 2003 among the 29 banks was 2.3 per cent, below the pre-Budget report prediction of 2.5 to 3.0 per cent

The Conservatives seized on the figures saying Gordon Brown's spending plans were based on optimistic growth forecasts. Michael Howard, the shadow Chancellor, said: "The Chancellor has had to downgrade his growth forecasts once. If he has to do so again it will damage his credibility even further."

The Treasury said it published economic forecasts twice a year and would not comment further until it released its latest predictions in the Budget, which is expected to take place in March. "No country can insulate itself from the ups and downs of the world economy," a spokesman added.

There was more bad news from a further drop on the London stock market. This was the eighth consecutive fall – equalling December's unprecedented losing streak. The FTSE 100 closed down 58.7 points, or 1.6 per cent, at 3,678 points, a whisker above the 3,671 hit last September, which in turn was a six-year closing low.

"It's all war, war, terrorism and war ... fears at what it might end up costing the UK economy and the global economy," Hilary Cook, the director of investment strategy at Barclays Private Clients, said. "That gives the market a very nervous feel."

The market has now fallen 8 per cent since the start of the year, which may increase the pressure on the Bank of England to cut interest rates.

The minutes of the January meeting of the Monetary Policy Committee showed it split seven votes to two for the fourth month in a row when it decided to keep rates on hold.

Stephen Nickell and Christopher Allsopp called for a quarter-point cut, saying the balance of risks lay to the downside on growth and inflation. But the majority said there was only tentative evidence that consumer spending and the housing market were slowing. They said the main news came from a weaker world economy, adding that overseas central banks had "scope for policy response" – a hint to the European Central Bank to cut rates.

The Confederation of British Industry backed the Bank's decision despite publishing figures showing UK factories were running at their slowest rate for 20 years. It denied it was "wimping out" by not calling for a rate cut. Ian McCafferty, the CBI's chief economist, said the current level of rates was "about right" given the overall picture for the UK economy. "We are not wimping out," he said. "Interest rate policy is not run with one sector in mind."

The CBI quarterly industrial survey showed output, optimism, investment plans and workforce jobs all fell over the past four months. Three-quarters of firms are running below full capacity – the worst since January 1983.

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